Politicians and pundits across the political spectrum have been calling for cutting back the tax break that people get for making donations to charities. With the country's finances in such a mess, they say, we simply can't afford to be so generous about rewarding charitable giving—especially when it's mostly the very rich who claim the deduction. Even though trimming or eliminating the deduction won't solve our fiscal problems, they say, the contribution will certainly help get us closer to making ends meet.

Opponents of cutting back argue that things aren't that simple. The deduction, they say, is a critical incentive that keeps much-needed cash flowing to charities. And donations have already fallen in recent years—at a time when the need for services is soaring.

Yes: It Doesn't Increase Giving

By Daniel J. Mitchell

The charitable deduction can go.

For all the praise it gets, there's just no evidence that the tax break leads people to increase their giving—but it does lead them to make bad choices about giving. What's more, it favors a segment of the public, the very wealthy, that can afford to give without a break. And cutting the deduction does a lot less economic harm than other ways of raising tax revenue.

To be clear, I feel strongly that the best way to help charities is to boost economic growth, which leaves people with more money to donate. And I think the best way to do that is to replace our current system with a simple and fair flat tax. But even without that radical change, I don't think there's a compelling argument for the charitable deduction.

No Big Incentive

Let's start with the most basic point: It doesn't do what it promises—that is, to boost charitable giving.

ENLARGE

Daniel J. Mitchell
Matthew Barrick

Vote and Discuss

Over the decades, there have been major changes in tax rates and thus major changes in the tax treatment of charitable contributions. At some points, there has been a big tax advantage to giving, at others much less. Yet charitable giving tends to hover around 2% of U.S. gross domestic product, no matter what the incentive.

So, trying to influence people's decisions by giving them a tax break is pointless. Efforts to spur more giving—such as extending the deadline to claim deductions, so people can help out victims of a tragedy—may be well intentioned but amounts to little more than grandstanding. Year in and year out, that 2% stays roughly the same. At most, it affects when people give, not the amount.

Another reason to drop the deduction is that it's exclusive—and it gives a break to people who really don't need one. Upper-income households are the biggest beneficiaries of the deduction, with those making more than $100,000 per year taking 81% of the deduction even though they account for just 13.5% of all U.S. tax returns.

The data are even more skewed for households with more than $200,000 of income. They account for fewer than 3% of all tax returns, yet they take 55% of all charitable deductions.

Pressure to Write Checks

These are people who can not only afford to give up the tax break, they would very likely give to charity without the deduction. They would still face tremendous cultural pressure to write charitable checks, as well as the prompting of their own conscience. Besides, many of them would still get nice perks for doing good—like seats at the opera or buildings named after them.

Sure, there are surveys that say wealthy people will cut back on giving if the deduction is limited or eliminated. But, again, history shows that whatever the incentives, total giving has stayed about the same, year in and year out. Why would the wealthy stop writing checks now?

Cutting Corners

What's more, the case for the deduction is weak even if you look at those people who do write their checks with tax in mind.

By focusing on getting a break, donors get sloppy, and they don't carefully monitor nonprofits to make sure their money is being used wisely. If it costs you just 65 cents to give a dollar to charity after taxes are figured in, you're less likely to pay attention to where you put that dollar, or how every cent is being used. The deduction becomes the tail that wags the charitable dog.

Charities, meanwhile, get fatter and lazier because of that dynamic. Think of all the exposés in recent years about charities that devote an overwhelming share of their budgets to administrative costs and marketing expenses. No system will create perfect nonprofit groups, but cutting back or cutting out the deduction would break the cycle of inefficiency that now exists.

Finally, ditching the deduction is one of the better options for raising tax revenue here and now. To be clear, I don't want to give more revenue to Washington. That's like putting blood in the water with hungry sharks around.

But if politicians are going to extract more money from the private sector anyway, reducing or eliminating the deduction is much less damaging to growth than imposing higher marginal tax rates.

Mr. Mitchell is a senior fellow at the Cato Institute in Washington, D.C. He can be reached at reports@wsj.com.

No: Nonprofits Are in Dire Need of Funds

By Diana Aviv

Limiting the charitable deduction would be a tremendous mistake with potentially catastrophic consequences for groups that do good.

This bit of tax law is a crucial incentive that gets people to give, and give deeper than they otherwise would. Limiting it—or worse yet ending it—would rob funds from nonprofits at a time when charities are already struggling to meet increased demand for programs and services. It would also curtail one of the few government policies that encourages people to be generous with their money instead of using it for their own gain.

A Vital Motive

Proponents of limiting the charitable deduction—which I call the charitable incentive, since it does so much to spur giving—argue the tax break does little to encourage giving.

ENLARGE

Diana Aviv
Independent Sector

I couldn't disagree more. It's true that Americans give to charitable causes for many reasons. It's also true that millions of taxpayers who do not itemize their returns give without the benefit of receiving a deduction. Yet more than 80% of those who itemized their tax returns in 2009 claimed the charitable deduction and were responsible for more than 76% of all individual contributions to charitable organizations.

Donors have also said it's a vital incentive. According to a 2010 Indiana University survey, more than two-thirds of high-net-worth donors said they would decrease their giving if they did not receive a deduction for donations. In fact, experts estimate that limiting the deduction could reduce available funding by as much as $7 billion next year. If there were no deduction at all, some experts predict giving would decrease by as much as $78 billion per year. For comparison, individual charitable giving was about $218 billion last year.

The power of the incentive can also be seen in the timing of charitable giving. More than 22% of online charitable donations are made on Dec. 30 and 31 each year, underscoring the extent to which tax considerations influence behavior. Congress clearly thinks the deduction has an impact, since it has at times adjusted the deduction to boost giving. After the January 2010 earthquake in Haiti, for example, taxpayers could claim a 2009 deduction for donations to Haiti-relief efforts through March 1, 2010.

Critics of the deduction also note that donation levels have been steady over time, even as incentives have changed. Therefore, they argue, it won't change if the deduction is pulled back. But since the 1970s, when charitable giving was first tracked, the value of the deduction has always been equal to a taxpayer's marginal tax rate. Now there are proposals to decouple the deduction from a donor's tax rate. Experts contend this will reduce the incentive effect and cause a decline in giving.

ENLARGE

Another common argument in favor of limiting the deduction is that it asks a sacrifice from those who can most easily afford it. Again, wrong. The sacrifice will come from those with the greatest need for a helping hand. The deduction is not about who benefits from giving, it is about who benefits from support—charities and people who rely on their services.

To those who claim that a charitable deduction makes donors lazy about monitoring charities: There is no evidence that correlates responsible giving practices with having an incentive to give more money.

Then there's the claim that cutting back the deduction will make charities operate more efficiently. That suggests that charities are bloated. But the Nonprofit Finance Fund, a community development financial agency, found that in 2011, 56% of organizations either operated in a deficit or at break-even.

Charities are among the most effective institutions in the country and are getting better. They operate lean and mean because they have to. They are monitored by bureaucracies, donors, their own volunteers and the communities they serve.

Finally, there's another important consideration. The charitable deduction is unique in that it's a government incentive to sacrifice on behalf of the commonweal. Unlike incentives to save for retirement or buy a home, it encourages behavior for which a taxpayer gets no direct, personal, tangible benefit.

It's this kind of behavior that we should encourage and reward. Rather than limiting that incentive, Congress and the president should explore opportunities to expand the giving that allows charitable organizations to improve lives every day.

Ms. Aviv is president and CEO of Independent Sector in Washington, D.C. She can be reached at reports@wsj.com.

Readers Weigh In on the Charitable Deduction

Should we end the tax deduction for charitable donations?

Here's a sampling of reader comments from an online poll.

I am in favor of getting rid of everything but the standard deduction, but if we're talking piecemeal then this is one of the deductions that actually deserves to stay.

— Randy Ribarchak

The Democrats will push the removal of this "loophole." They want to replace God, community, religion, freedom and liberty with government/state control.

The Democratic party is morphing into the Communist party.

— Frank Mostek

Lower tax rates and get rid of the mortgage deduction and the charitable deduction, get rid of farm subsidies while they are at it and all the other giveaways to various interests.

This has to be done in conjunction with lowering rates, not raising them like the left-wing ideologues would like.

— Daniel Rittereiser

I do not believe that doing away with the deduction would significantly impact charitable contributions.

People give for all sorts of reasons—a tax deduction is way down the list.

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